The little-known inheritance tax trap that lies in wait for 14 years
A race is under way to hand cash and other assets to younger generations ahead of a new inheritance tax levy on unspent pensions.
TL;DR
- Families are accelerating gifts to younger generations to avoid a new inheritance tax levy on unspent pensions.
- Using trusts to manage and transfer wealth can lead to complex tax implications, including a potential 14-year look-back period for inheritance tax.
- The 14-year rule arises from the overlap of two seven-year 'look-back' periods for different types of gifts (Potentially Exempt Transfers and Chargeable Lifetime Transfers).
- A detailed example shows how mixing a gift into a trust (CLT) with a later outright gift (PET) can result in a significantly higher inheritance tax bill.
- Key strategies to avoid this trap include maintaining clear records of all gifts, understanding the tax treatment of different transfer types, and spacing significant gifts (especially trusts and outright gifts) at least seven years apart.
- Professional advice is essential due to the complexity of inheritance tax rules and individual circumstances.